Cracking down on high flying wilful defaulters –Part II

It is rightly said that anyone borrowing a few lakhs has to worry but it is the bank that has to worry when it has lent crores! This is the concluding part of a two part series

Corporate debt restructuring arrives


The boom having come to an abrupt end, the focus shifted to increase in numbers of bad loans or distressed assets by ushering in an era of corporate debt restructuring (CDR) giving it new name greening of loans to recognise impairment by allowing the reorganisation of outstanding debt obligations entailing modification of contractual terms to provide for concessions in interest and/ or principal or extension in maturity period to bring about reductions in debt burden to increase the ability of the borrower to meet debt obligations; with the lending banker having to waive or forgive or convert a part of debt into equity.

Initially the Cell was expected to deal with companies facing financial difficulties owing to conditions beyond their control and/ or internal reasons essentially demand downturn, rise in raw material costs, policy bottlenecks like cost over-runs arising out of delays in land acquisition, forest, environment resettlement and rehabilitation clearances. The Cell was also expected to seek ways and means to access alternate or cheaper sources of raw material, harnessing better technology to bring down manufacturing costs, tap new markets and ultimately revive their fortunes in order to accelerate repayments. It essentially envisaged the revival of institutional borrowers facing financial difficulties by ensuring safety of the money advanced by lenders by way of timely support through restructuring of debts by a mix, including waiver of interest and penalties, rescheduling the tenure, conversion of working capital finance into term loans, standby and supplier credit, conversion of debt into equity and other modes to soften the burden of the individual institutions or syndications or consortiums.

A report on 6 October 2013 says there is no let-up in requests for CDR essentially out of economic downturn, slack demand, policy logjam, delays in statutory approvals, forest/ environment clearance, land acquisition, fuel shortage coming in the way of project implementation making debt servicing impossible for the borrowers. Between April-September 2013, the CDR Cell received 59 applications as against 74 during the same period in 2012. However, the quantum of debt increased 63.5% to Rs64,500 crore compared with Rs39,435 crore a year ago period.

The sharp jump by over a third in the number of bank borrowers queuing up for debt recast has prompted ministry of finance (MOF) and Reserve Bank of India (RBI) to consider calling on ‘external experts’ to ‘bring fresh perspective’. This zeroing in only on experts from public sector and possibly technocrats from major sectors like steel, power, roads and textiles calls for a rethinking. These technocrats as ‘experts’ may be in a better position to advice on manufacturing and marketing aspects. However, it must be remembered that these technocrats may not be in a position to identify and to pinpoint the root cause of the illnesses like diversion and/ or siphoning off of funds, bad financial planning, mismanagement and frauds perpetrated by wilful defaulter-promoter/ borrowers. This calls for more of forensic accounting/ auditing skills that only veterans in the banking and auditing areas can bring out by identifying more precisely the misdemeanours. The genuine financial experts should be called in first before inviting other non-financial technical ‘experts’. Those with the requisite expertise can take immediate possession of assets to distribute them to stakeholders and creditors as is the practice in other countries.

While the schemes envisaged sacrifice on the part of the borrower. It requires them to bring in additional contributions by way of increased margins it has been noticed that the wrong type have sought to grossly abuse the scheme by first availing of the benefits and then reneging on their commitments. It is these dubious players that are primarily responsible for their woes has they had misused the initial monies from initial public offerings (IPOs) as well as term and working capital borrowing all by directing them elsewhere for personal gains.

The numbers of borrowers lined up for debt restructuring has witnessed a substantial jump over the last year:







Aggregate Debt

Rs92 crore

Rs68 crore




Aggregate approved

Rs229 crore

Rs151 crore


“An assessment of the impact of the liquidity contagion in the Indian banking system indicates that the failure of the large lenders in the system could have a significant downstream impact on the liquidity in the system and could also cause a few other banks, in turn, to be liquidated.” One only hopes it doesn’t take Indian banking system the Greek way!

On 30 May 2013, the RBI, in the first step in clamping down on unbridled restructuring of loans by banks increased the provisioning requirements for fresh standard restructured advances to 5% from 2.5% and for the existing stock, it will be phased over three years. Having learnt the hard way, the RBI has directed banks that promoters of the restructured company must bring in at least 20% of the amount sacrificed by the bank by way of repayment loss or 2% of the total restructured debt, whichever is higher. Also banks have been cautioned against taking corporate guarantees instead of promoters’ personal guarantees.

Deputy Governor Dr KC Chakrabarty

Speaking at a seminar on CDR, RBI Deputy Governor, Dr KC Chakrabarty, has rightly blamed commercial banks for being biased in favouring only loans of privileged large corporate borrowers to the detriment of much smaller home, consumer, vehicle and personal loans extended to individuals and SMEs, who face the brunt of bank attachments. Lenders are loath to act against large borrowers because they face large legal hurdles like court stays. The smaller borrowers lack the capacity and are forced to meekly concede to the attachment even when the loans could possibly have been restructured with minimal sacrifices. It is rightly said that anyone borrowing a few lakhs has to worry but it is the bank that has to worry when it has leant crores! 

Dr Chakrabarty says 20% of the restructure loans turn non-performing assets (NPAs), though not all of them result in loan losses. He said that banks must help out when the borrowers face crisis due to external factors. He rightly questioned the attitude of top honchos of restructure applicants – “Are you taking a pay cut or making use of public transport?” According to him, the lenders must insist that promoters infuse substantial equity upfront before the exercise that ought to be necessarily completed within 90 days.

Later on at an ASSOCAM meet in November 2012, Dr Chakrabarty rightly lamented – “The corporate sector is responsible for a major part of the rising bad loans causing inconvenience to honest borrowers… NPA is a creation of the corporate sector... You borrow from banks and you do not repay them in time.” He has not spoken on the steps to curb this malaise. He reiterated this lament again at Chennai end December 2012, during the release of a book ‘Indian banking reforms and after.’

Recent reported CDR cases

Kingfisher Airlines, Bengaluru

This is a case of everything gone wrong from the word go – from enhancing all kinds of borrowing limits on dubious collaterals like brand name, unenforceable  group company guarantees, pledge of shares of associate companies, converting the debt into dud equity at inflated values et al. The chairman and managing director (CMD) of State Bank of India (SBI), the lead bank heading a consortium of 17 banks with an exposure of over Rs7,000 crore with the securities SBI is expected to realize only 25%, has this to say now – “We are blazing all guns and taking all steps to recover loans.” Nothing seems to be happening at ground zero!

Lanco Infratech Ltd, Hyderabad

On 11 December 2013, a consortium of 27 lenders headed by the IDBI Bank cleared an Rs7,000 crore CDR package to release Rs3, 500 crore as working capital advance to enable it to resume engineering, procurement and constructions operations. Of this Rs2,500 crore will be fund based.     

Wockhardt Ltd, Mumbai

One of the earliest CDR models is the Wockhardt recovery package that made the company ‘an inspiring comeback story from being the most visible victim of uncertain times for a company that had over-stretched itself with a spate of overseas buys’. With more than half of its sales coming from exports, currency fluctuations hit the company hardest, adverse global market conditions, liquidity constraints, it defaulted on repayment of $110 million foreign currency convertible bonds (FCCBs) and was faced with a winding up petition. With debts of over Rs3,800 crore in 2008, it sought the CDR mechanism offered by its bankers’ for Rs1,400 crore. The debts included $250 million EU debts, restructured for repayments during 2013 to 2015, Euro 88 million of French debts telescoped over 10 years by 2020 and Irish Euro 35 million. The lending banks successfully worked out a comeback formula that involved clean-up operations requiring the company to exit from non-core businesses, focused growth plans to bring about paybacks. Analysts put the compensation for banks’ sacrifices at Rs160 crore up to March 2012 and Rs45 crore more for March 2013.

Electrosteel Steels Ltd, Kolkatta

About 27 lenders led by SBI are expected to sanction a Rs6,950 crore debt recast plan for the troubled ESL, which landed into troubles due to delays of over a year in commissioning their Rs10,000 crore steel plant at Bokaro because of delays in clearances in the aftermath of illegal mining controversy. Efforts made in January to raise nearly $250 million either as loan or equity investment failed.

Orchid Chemicals & Pharmaceuticals Ltd, Chennai

The company has informed the BSE, “Due to continuing liquidity constraints and pressure on operations” it has initiated the process of restructuring its debt through SBI. The revenues were down 28% at Rs1,269 crore and net loss of Rs275 crore in 2012-13. Its total debts stood at Rs2,200 crore. The company plans to repay Rs800 crore received from its sale of the Penem- Penicillin business to Hospicia. Currently over 70% from its promoter holding (at 33%) is pledged.    

Ind-swift Ltd, Chandigarh

A Nine bank consortium has filed with the RBI CDR Cell an application to sort out loans extended to Chandigarh based Ind-Swift Ltd, who had defaulted due to ‘shrinking operating margins, high levels of inventories, low liquidity and escalating debt costs, impacted competitiveness arising out of mushroom growth  units in the unorganized sector because of tax exemptions and subsidies by neighbouring states, inability to pass on material cost increases to overseas customers on account of fixed nature of contracts, substantial cash accruals going into servicing debts, a fire in an unit  adding  to the liquidity crunch’. The debt recast contemplates repayments of Rs163 crore term loans and Rs102 crore corporate loans over eight years at a floating rate of 12%. Interest on term loans to be converted into funded interest term loans at 10.5% and letters of credit (LoCs) devolved up to 30th June to be converted into working capital loan.

Gammon India Ltd, Mumbai

Gammon’s total debt rescheduled under CDR, including short and long term loans, non-convertible debenture is worth Rs14,814.17 crore. Upon the promoters providing personal and corporate guarantees, pledging shares of four of its subsidiaries, its lenders had sanctioned a ‘priority loan for meeting its immediate financial needs, waived off penal charges from the cut-off date to the date of implementation of the package, reduced the rate of interest by 1% for the 15-months January 2013-March 2014. It has reported a net loss of Rs311.49 crore so far compared to Rs445.67 crore in 2012-13.  

(Additional inputs from PTI, The Hindu Business Line and Economic Times.)

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)




3 years ago

My friend having Gold loan with a branch of the bank approached the BM to consider loan waiver scheme of the Bank's adalat slated on 15/03/2014. But, he was denied his request, as the pledge of the gold is suffice to recover the dues by auctioning it. Even, he did not consider his request to postpone the auction date post-LS polls, as most of the parties promised to waive gold loans in their manifesto.

Yerram Raju Behara

3 years ago

The figures in the table need a relook. The aggregate debt cannot be less than approvals. Further, the CDRs in thousands of crores of rupees and not this miniscule. It is always desirable to mention the source of the figures to give authenticity. Politically influential have been adding pressures and the RBI nominees and GoI nominees on pSB boards should be made accountable for their silence.


3 years ago

The Promoters / Founders / Directors of many of Companies might be affiliated to Ruling Party and the Political Considerations might have resulted in throwing good Money against Bad Loans. This Study may bring out more interesting Facts .GOl's Change in 2014 Elections may change Resctured Loans into Bad Loans.Lanco Infra is of Congress MP.

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How nationalised and private banks can raise capital

Most bank, whether state owned or private, have sufficient reserves and access to the capital needed for which, a number of methods, including rights issue, can be employed

Last week, finance minister P Chidamabaram, after a review meeting with the public sector banks said that the Indian government may have to seriously think of ways and means to increase capital needs of state owned banks. Broadly, he felt this could be achieved by issuing shares to the employees, invite greater participation by pension and insurance funds and/ or by issuing rights shares to minority shareholders. We would know in due course what the state owned banks might do, possibly, after the elections are over.


In the last couple of months, we covered the issue of many corporations, who had advertised full details of the third quarter results, for the period ending 31 December 2013.  We go into this information, once again, but this time, we shall restrict ourselves to review the situation of banks, both private and state owned, for a study. The figures speak for themselves:

                                                                                                                                                        (Rs in lakh)


Name of the Bank

Paid up Capital



Allahabad Bank




Andhra Bank




Bank of India




Bank of Maharashtra




Canara Bank




Central Bank of India




City Union Bank




Corporation Bank




Dena Bank








IndusInd Bank




Karnataka Bank




Karur Vyasa Bank




Oriental Bank of Commerce




State Bank of Mysore




Vijaya Bank




Yes Bank




From the above basic financial data it will be observed most of these banks have sufficient reserves on hand. So, whether they are state owned or private, they have access to the capital needed, and for which, a number of methods can be employed, of which the finance minister already hinted the possibility of rights shares being issued. Well, that's one means of getting the additional capital required.


What about the other, such as the bonus issue, which many of these banks many not have resorted to in the last few years?  Hypothetically, let us assume the paid up capital of a state owned bank is Rs100 lakh, of which is 80% government and 20% in minority shareholding by public investors. Let us also suppose the face value is Rs10 and the current market price at Rs70.


The first option could be, for the Board, to give a 1:1 bonus, with the government waiving their right to accept the same. The current market price (CMP) becomes Rs35.  At this point of time, the government may divest by sale part of its holding in the market, or issues this lot to employees or even offer a suitable percentage to pension funds, UTI and other institutions. Later on, when the market stabilizes, the Board can go in for a rights issue.           


The second option could be for the Board to issue Rights on a 1:1 basis to minority shareholders only, at the current market price, with the government not taking this offer, but letting it be diverted to employees, pension funds, LIC, housing boards, UTI etc. Here again, once this is settled, the Board may consider capitalization by a bonus issue.


The exact modus operandi can be worked out by a Chartered Accountant, tailor made for each institution.  However, the Government's aim should be to reduce its holdings to not more than 26% of the capital employed.


Finally, all the state owned banks must be run by professionals, by truly qualified bankers, and not to be treated as the resting post for retiring government officials, politicians and their nominees.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


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